Naspers is still a buy

The company’s stake in China’s Tencent has brought it huge profit, but other operations’ contribution lagged

Tencent has delivered the goods yet again for Naspers, ramping up net profit 43%, to US$5.97bn, in its year to December.
For Naspers, proud owner of a 34% stake in the Chinese online giant, it translates into an equity accounted profit of $2bn.
Not bad going for what was something of a hit-or-miss venture capital move made by Naspers in 2001, when it paid $33m for its stake in Tencent, then an unprofitable online instant messaging start-up.


Today, this stake is worth $94bn, based on Tencent’s $276bn market cap.
Naspers’s move in 2001 bought it a place in China’s Internet sector which, with only 33m users at the time, was on the verge of explosive growth. At the end of 2016 Tencent alone reported 889.3m monthly active users on its WeChat social network mobile platform. The number was up 27.6% on a year earlier.
Performance across Tencent’s value-added online services, which include its core game offerings and social networks, was strong, with revenue up 34% to $15.7bn — 71% of total group revenue of $22.1bn.

Impressive as Tencent’s results are, its fourth-quarter 47% net profit rise came in for some criticism. It fell short of analysts’ estimates of a 54% rise, reports Bloomberg.
Evan Walker of 36One Asset Management dismisses criticism. "It was an unbelievably good result from an unbelievable business," he says. "I don’t see Tencent’s growth slowing anytime soon. It is adding a lot of new revenue streams."

 

Among them are mobile payments, a sector Tencent entered in 2014 through the launch of WeChat Pay as a rival to Alibaba’s then dominant mobile payment service Alipay.

A roaring success, WeChat Pay now has a market share of almost 40% and is growing rapidly. Tencent reported that in December transactions on its platform exceeded 600m/day, a rise of 92% year on year.
Digital advertising is another rapid growth area for Tencent, which achieved a 54% rise in revenue from this source in 2016, to $3.9bn.
It gave Tencent a 9.8% share of a Chinese market worth $39.6bn in 2016, according to research firm eMarketer.

Bigger things lie ahead, believes eMarketer, which predicts that Tencent’s digital advertising revenue will stand at almost $11bn in 2018 and its market share at 17.9%.
Tencent is also an avid acquirer. Among big deals in 2016 were the acquisition of a 73% stake in Finnish games developer Supercell for $8.3bn and the upping of its stake in China’s dominant music streaming service China Music from 16% to 60% at a cost of $2.7bn.
At Tencent’s disposal is the powerful cash flow needed to support its aggressive expansion and product innovation, which is driven by a research and development team of about 15,000. Free cash flow (cash generated after all capital expenditure) has risen sixfold over the past five years, with a 50.3% rise in 2016 taking it to $7.97bn.
It is up to Naspers, which has built a bewildering array of operations under 16 major brand names in over 130 countries, to prove to the market that it is not a one-trick pony.
It has done a poor job so far. The group’s market cap stands at R982bn, while its 34% stake in the R3.42trillion market cap of Tencent is worth R1.16trillion. It leaves Naspers’s other assets, which generated revenue of almost $3bn in the six months to September, valued at a negative R178bn.

 

The precise negative amount is arguably impossible to assess. "If Naspers were to sell its stake in Tencent no-one knows what the tax implications would be," says Nadim Mohamed of First Avenue Investment Management.
But Mohamed stresses: "The assets making up the rump of the group’s interests are definitely undervalued. A large part of [CEO] Bob van Dijk’s bonus is linked to unlocking value." Van Dijk has been at the helm since April 2014.
However, analysts are overwhelmingly positive, with 16 "buys" on Naspers and no "sells". On average they expect the price to reach R2,956 within a year — 28% above its current level.
Seemingly, a key concern of the market is that Naspers has invested on a grand scale in venture capital-type start-ups.

The result is that overall the Naspers rump is running at a loss. After-interest costs came in at $120m at the pretax level in the six months to September.
"The market first wants to see Naspers produce a profit from its huge capex," says Andrew Kingston, an analyst at Sanlam Investment Management. Naspers pumped a total of $4.64bn into new developments and acquisitions in its past three financial years.
Is the market unfair to Naspers? Taxi industry disrupter Uber lost $3.8bn in the nine months to September, yet is capitalised
at $69bn.

But the positions of Naspers and Uber are very different, points out Walker. "Uber is unchallenged in its market," he says. "Naspers is taking on big-name global players."
An example is in SA, where the group launched its subscription video-on-demand service ShowMax in August 2015. In January 2016 it found itself facing US giant Netflix and in December Amazon’s Prime Video.
ShowMax is also facing the likes of Netflix and Amazon in its first non-African market, Poland, which it entered in February.
Amazon is proving to be a force to be reckoned with in India’s e-commerce market, a key element of Naspers’s expansion strategy, as well. The group noted in its interim report: "Amazon, on
the back of heavy investment, closed the [market share] gap on Flipkart."
Another crucial area of expansion for Naspers is in the digital classifieds space, where its key growth driver is 95%-owned OLX Group. Active in 44 countries, OLX is market leader in 22.
Naspers is also taking on the US classifieds market through a controlling stake in Letgo. Though these are early days, Mohamed says Letgo has progressed faster than anyone expected.

Revenue from the Naspers classifieds businesses is growing apace, rising 76% to $1.38bn in the six months to September. But profits remain elusive.
The company’s biggest rival in the global classifieds market
is US giant Craigslist, which operates in 70 countries. And competition is increasing, with Facebook entering the fray in late 2016 and Amazon moving to globalise its classifieds offering.

How successful or otherwise Naspers’s classifieds and its many other developmental-stage businesses will ultimately be is impossible to forecast. "Naspers is not a one-year story," says Mohamed.
Tencent is likely to remain for now the dominant driver of the company’s fortunes.
Fortunately, Tencent’s bull trend appears far from over.